This week's TGIF considers a recent Supreme Court decision that enabled employees to claim priority entitlements against a 'true employer' even where the contracts of employment named a different employer. The decision provides important guidance to insolvency practitioners, creditors, employees and other stakeholders in insolvency processes.
Key takeaways
- Employees are entitled to be paid preferred entitlements from
the proceeds of sale of circulating assets owned by a group entity
that is their 'true employer', regardless of which entity
is a party to the contract of employment.
- Whether an entity is a 'true employer' is determined by
substance, not just by the name of the entity on the payslips and
the contracts of employment.
- Companies using 'employer of record' structures with assetless subsidiaries should be aware of the factors that are given weight in insolvency scenarios when determining priority between employees and secured creditors.
Background
Mosaic Brands Limited (Mosaic Brands) was the publicly listed parent company of a large retail group selling women's fashion brands through a network of over 600 stores.
Noni B Holdings Pty Ltd (Noni B), a subsidiary of Mosaic Brands, was the named employer for employees of the group under employment contracts (at least since 2022). Noni B had no bank account, revenue or assets. Mosaic Brands, however, paid all wages, superannuation and entitlements and made all employment decisions.
In March 2025, the group entered voluntary administration, following which receivers were appointed. The receivers first attempted to sell the business but then announced that all of stores would be progressively closed and ultimately sold the assets of the group.
The assets sold and realised by the receivers were predominantly inventory, 'circulating assets', belonging to Mosaic Brands, rather than Noni B. Under section 433(3)(c) of the Corporations Act 2001 (Cth) (Act), and taking into account section 561 of the Act, realisations from circulating assets must first be applied to pay certain employee priority claims before they can be distributed to secured creditors.
Although a significant amount for circulating assets was realised (about $205 million), it was not enough to pay both employee entitlements (around $21 million) and secured creditors in full. The question arose for the receivers as to whether the realisations from the Mosaic Brands inventory should be applied in priority to the employee entitlements of Noni B as the named employer.
The application
To resolve the uncertainty, the receivers applied to the Supreme Court for declarations as to whether Mosaic Brands or Noni B was the 'true employer' of the group's employees, the outcome of which would determine whether employees would be paid in priority to secured creditors from the proceeds of the circulating assets. The Commonwealth, as subrogated creditor under the Fair Entitlements Guarantee (FEG) scheme, was directly concerned with the application and supported the declaration that Mosaic Brands was the true employer.
The decision
In Mosaic Brands Limited (admins apptd) (recs and mgrs apptd) [2025] NSWSC 959,Black J held that Mosaic Brands, not Noni B, was the 'true employer' for the purposes of employee priority payments and found that Noni B was little more than an 'employer of record'. His Honour emphasised that the most important factor was that the relevant financial obligations with respect to the employees' wages and other entitlements could only be met by Mosaic Brands as the operating and revenue-generating entity in the Mosaic Group, not by Noni B.
Black J referred to the decision in Re Spitfire Corporation Ltd (in liq) and Aspirio Pty Ltd (in liq) (2022) 160 ACSR 394 (Spitfire) and set out the following considerations that are relevant to assessing whether an employer is a 'true employer':
- whether the company paid the employees' remuneration;
- whether the employer of record had assets or revenue from which
it could meet employees' entitlements;
- whether the employer of record had any purpose other than to be
an employer of record; and
- whether the employer of record exercised practical and legal control and direction over the employees (although this will be given limited weight where the putative employers are part of the same corporate group).
Implications
This decision reaffirmed the key characteristics of an employment relationship that courts will take into account to determine whether an employer is a 'true employer'. Where an entity is actively involved in paying employee-related costs and exercising control over employment-related concerns, the entity will likely be considered a 'true employer' and employee claims may be made against that 'true employer' despite employee contracts naming a different entity.
On the facts in this case, this meant that the employee entitlements were to be paid in priority from the proceeds of the sale from inventory owned by an entity that was not the employer of record.
The principles relevant to priority are addressed in our previous article titled Circulating assets come and go, security remains resilient, which covered how circulating assets should be distributed after the Spitfire decision.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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